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Entrepreneurs Eye the Tax Cut

Complying with the tax code is expensive, not only in dollars but in time. The average taxpayer spends about 14 hours filling out tax forms each year, which means the country spends roughly 2 billion hours on this project, says William C. Dunkelberg, chief economist for the National Federation of Independent Business (NFIB). "That's more hours than we spend making automobiles in this country," he notes.

Taxes were high on the agenda Apr. 13 during a roundtable discussion in Washington, D.C., on the state of the economy for small businesses. There, Dunkelberg and Dan Danner, senior vice-president for public policy at the NFIB, discussed what small-business owners think about the tax legislation currently in Congress. Among the points they made:

-- Don't talk about a 10-year, $1.6 trillion tax cut because who knows what'll going on with the economy or Congress a decade down the road. The issue is: What tax cuts are going to be made right now? For the same reason, small-business owners don't like the notion of phased-in tax breaks. They might never become fully phased in. "This is Congress, after all," said Danner, referring to the changing winds -- and fortunes -- of politics.

-- Because more than 80% of small businesses claim the bulk of their income on individual tax returns, President Bush's proposed cut in individual tax rates is seen as a boon to NFIB members. Those cuts, and proposals to repeal the estate tax, are being watched closely by small companies. Dunkelberg drew a simple illustration of the estate tax problem: "If I save $10,000 a year for 40 years, that's a $1.7 million estate. Even with the current exemption of roughly $700,000, I'm going to have to pay taxes on $1 million dollars that I've already paid taxes on if I want to leave it to my children. That's a heavy bias toward consumption rather than saving. We have to stop penalizing important things like work, savings, and investment."

-- A nice, simple tax code would be good. The small-business owner, feeling overwhelmed by paperwork, cringes at complexity. Many NFIB members eligible for the investment tax credit never take it because keeping track of the paperwork from year to year is too time-consuming, Dunkelberg said (see BW Online, 4/17/01, "What's So Complicated about Simplifying Taxes?").

-- A tax cut would be good not only for small-business owners but for the economy, which is highly dependent on consumer spending. "If you give people a tax cut, history tells us they will spend most of it and save some of it," Dunkelberg said. "You would get a kick in GDP from the spending." History also shows, according to Dunkelberg, that the larger the share of GDP the government controls, the worse it is for the economy: "Check out the Soviet Union," he said.

Chances are good that by next tax season, the country's small-business owners and every other taxpayer will have new rules to follow, for better or worse. Congressional committees expect to have tax bills presented for debate by Memorial Day weekend, and the Bush Administration is pushing to have a bill on the President's desk by mid-July. That way, it could be a done deal before the August recess. By Theresa Forsman in New York

Do you have a small-business tax question? Tax professionals will answer your questions in the Tax Adviser column, appearing here Wednesdays. E-mail We will not print your name, address or phone number, but please provide this information.

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